On October 17, the Standing Committee of the 13th National People’s Congress of the People’s Republic of China adopted the Export Control Law of the People’s Republic of China (Export Control Law). The new law becomes effective on December 1, 2020. The Export Control Law comprises 5 chapters and 49 articles. It creates a comprehensive and unified export control regime that regulates the export of goods, technologies, and services that impact China’s national security.

Scope of Applicability and Targeted Parties

The Export Control Law applies to the export of dual-use items, military products, nuclear materials, and other goods, technologies, services, and items that are related to the protection of national security and performance of international obligations. (Controlled Items). Under the new law, the Chinese government will take prohibitive or restrictive measures on the transfer of Controlled Items from the territory of the People’s Republic of China to overseas, and on the provision of controlled items by any citizen or incorporated or non-incorporated organization of the People’s Republic of China to any foreign organization or individual. Furthermore, the Export Control Law will apply to the transit, transshipment, through transportation or re-export of controlled items, or the export of controlled items from any bonded areas, export processing zones or other special customs supervision zones or export supervised warehouses, bonded logistics centers or other bonded supervision premises to overseas.

China will apply the Export Control Law extraterritorially which means that the law will impact any person or entity, in or outside the normal territorial boundaries of China, dealing with the Controlled Items. Furthermore, the Export Control Law specifically prohibits any person or entity from providing any agency, freight, delivery, customs clearance, third-party e-commerce trading platform, financial or other services to any exporter engaged in any violation of export control regulations.

Export Control Measures and Licensing

The Export Control Law authorizes the State Council and the Central Military Commission (Authorities) to take measures and to enforce the new law. The key measures promulgated by the Export Control Law include:

-Export Control Lists. The Authorities shall establish and publish export control lists for the export of Controlled Items (Export Control Lists). Meanwhile, the Authorities are allowed to designate any goods, technologies, or services outside the Export Control Lists as temporarily controlled items (Temporarily Controlled Items) for up to two years.

-Under Article 11 of the Export Control Law, exporters in the business of exporting Controlled Items shall apply for special business qualification.

-Under Article 12 of the Export Control Law, in order to export any Controlled Item on an Export Control List or any Temporarily Controlled Items, exporters shall apply to the Authorities for a license. Furthermore, any exporter who knows or should know, or is notified by the Authorities that any goods, technologies, and services 1) endanger national security and interests; 2) may be used to design, develop, produce or utilize any weapon of mass destruction or its delivery vehicle; or 3) may potentially be used for terrorist purposes must apply for a license even if such goods, technologies, and services are not Controlled Items or Temporarily Controlled Items. The Authorities will approve or reject the issuance of license based on the following considerations: national security and interest; international obligations and commitments to foreign parties; type of export; the degree of sensitivity of the controlled item; export destination country or region; the end-user and end-use; relevant credit records of the exporter; and other factors as prescribed in laws or administrative regulations.

-End-User and End-Use Control. Articles 16 and 17 of the Export Control Law stipulate that exporters shall submit relevant documents and information proving the end-user and end-use to the Authorities and the Authorities shall establish a risk management system for end-users and end uses of Controlled Items.

-Under Article 18 of the Export Control Law, the Authorities shall establish controlled party lists (Blacklists) including importers and end-users that: 1) breach the law and regulations in connection with end-users or end uses; 2) endanger the national security; or 3) use any Controlled Items for any terrorist purpose. Once importers and end-users are included in the Blacklists, exporters are prohibited from transacting business with such importers and end-users. An importer or end-user on the Blacklists may apply with the Authorities to be delisted from the Blacklists if any of the circumstances described above no longer exist.

-The Authorities may restrict or prohibit the export of any Controlled Item to any specified destination country or region or to any specified organization or individual.

Penalties

Any person or entity violating the Export Control Law will be subject to administrative penalties and criminal penalties, including but not limited to warning, confiscation of products, fines, cancellation of an export license and imprisonment.

Impact on U.S. Companies

Due to the extraterritorial character of the new law, the Export Control Law will impact not only Chinese domestic companies in China but also foreign businesses located outside of China. However, like other Chinese laws, one notable characteristic of the Export Control Law is the vagueness inherent in the wording. For example, the new law does not clearly define what constitutes the provision of controlled items (commonly known as deemed exports). We expect that more specific implementing regulations and interpretations in connection with the Export Control Law will be published by the Authorities in the near future. Nevertheless, any U.S. business dealing with China should establish an internal trade compliance program to comply with China’s new export control regulations.

We have identified the following steps as critical and essential for an effective trade compliance program under the Export Control Law. These steps provide a basis and foundation for the compliance program but do not constitute an exhaustive list.

-Companies should utilize tools and services to constantly screen their goods, services and technologies coming from China, as well as their business partners, suppliers, customers, agents, end-users and other business counterparties (Chinese or non-Chinese) in order to make sure that such entities or persons are not subject to any trade sanction or restriction in China.

-A key in determining whether an export license is needed from the Authorities is finding out if any good, service or technology that companies intend to export falls under any existing Export Control Lists or the category of Temporarily Controlled Items published by the Authorities. Companies should hire qualified international trade attorneys with knowledge of Chinese export control regulations to have technical understandings of the items they import from China; to be familiar with the structures and contents of the Export Control Lists and Temporarily Controlled Items published by the Authorities; and to determine whether or not any authorization is required to export from China. Companies should closely monitor the Export Control Lists, Blacklists and other sanction lists published and updated by the Chinese authorities.

-Companies should design training programs together with international trade attorneys with knowledge of Chinese export control regulations and provide such training to their employees. A good training program should provide job-specific knowledge and communicate the responsibility of each employee dealing with Chinese business.

-Risk Management. Companies should hire qualified international trade attorneys with knowledge of Chinese export control regulations to identify the risks early on in order to assist companies in finding solutions to mitigate such risks. Furthermore, due to the rapid development of Chinese export control and trade sanction regime, companies should work closely with the attorneys to make proper adjustments and prepare for the new changes.

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Frank Xue, John Scannapieco and Alan Enslen are attorneys at Baker Donelson and members of the firm’s Global Business Team.